Interest rates

Federal Budget 2022: Why Mortgages Could Soar and Interest Rates Rise

With the cost of living being one of the main issues in the 2022 federal budget, a government cash inflow could be bad news for mortgagees.

There are fears that a federal budget spending spree could have a ripple effect and see interest rates rise, adding hundreds of dollars to monthly mortgage repayments.

With Treasurer Josh Frydenberg expected to announce large-scale cost-of-living packages on Tuesday evening, the splash of cash could lead the Reserve Bank of Australia (RBA) to raise its cash rate.

The current inflation rate stands at 3.8%, its highest level in 12.5 years, which is considerably higher than the RBA’s target range of 2-3%.

In order to bring inflation down, the RBA may need to raise the cash rate (also known as the interest rate that the RBA charges commercial banks), which is currently at a crisis low of 01.%.

In a research note for Commonwealth Bank, its chief economist Stephen Halmarick said the cash rate could be raised by 0.1% to at least 1.25%, which could push variable mortgage rates up by 2 .28% to 3.53%.

With the average Australian mortgage size set at $595,568 (according to the ABS), this could push annual interest payments up by around $13,400 to $21,023.

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“If the 2022/23 budget were to provide significant additional short-term fiscal stimulus, one outcome would be that the Reserve Bank of Australia (RBA) may need to raise the cash rate target above from our 1.25% estimate of ‘neutral’ in order to bring inflation back into the target range of 2-3%,” he said.

Whether that happens “will be a key factor to watch on budget night.”

His colleague Gareth Aird echoed this sentiment, writing: “Policies that seek to help households cope with higher consumer prices by increasing demand in the economy will put additional upward pressure on price”.

In turn, he said, this would increase the likelihood of the RBA raising the cash rate – and therefore driving up interest rates.

While RBA Governor Philip Lowe seemed reluctant to raise rates, he said that “it is plausible that the cash rate will be increased later this year,” during a speech at a Australian Financial Review Mountain peak.

This comes as the US Federal Reserve, the Reserve Bank of New Zealand (RBNZ) and the Bank of Canada have raised interest rates to combat rising inflation rates.

However, as the country with the second highest level of household debt in the world, at 119.3% of GDP, the effects of a rate hike would be felt more strongly in Australia than anywhere else.

As Mr Frydenberg prepares to present the 2022-23 budget later tonight, reducing the cost of living for households will be a top priority.

So far it has been confirmed that motorists will see a temporary fuel excise reduction of 44c/L, as well as one-off cash payments of at least $250 for pensioners and beneficiaries of the social assistance and a modest temporary cash payment for people earning less than $126,000.